Orwell Targets Bernanke: An Unteachable Hole in the Air

On Friday, October 15, 2010, Federal Reserve Chairman Ben S. Bernanke delivered
a dishonest speech: "Monetary
Policy Tools and Objectives in a Low-Inflation Environment." What follows
is not a critique of the talk, since that would be redundant. Please see one
of my recent articles "Exploiting
Bernanke" (September 21, 2010), which discussed the anticipated speech
of October 15, 2010. Also see, "Central
Bankers are Paid to Lie - Buy Corn" (October 5, 2010), which showed how
Federal Reserve Chairman Arthur Burns fibbed his way through the 1970s. Investors
who either believed him or were not adept at translating signals from the real
world suffered.

Bernanke's mendacious speech confirmed my general investment advice in "Central
Bankers are Paid to Lie": "Courses of protection include buying farms (including
machinery companies, grain commodity funds, water rights, and desalinization
companies), as well as precious metals, mining and drilling companies, and
freeze-dried food." As a guess, Bernanke's current intention (this will
change, and change often) is to add a trillion dollars to the economy. Such
a wild, mad experiment has never been attempted before, outside of Argentina,
Zimbabwe, and such.

The reason last Friday's speech could be analyzed three weeks before it was
delivered is Bernanke's predictability. He will do nothing that veers from
the course he found convenient for personal advancement three decades ago.
He has neither said nor would dare process a thought that deviates from his
doctoral thesis.

Even the title of his latest speech is a lie or stupid, as you wish - broadcasting
as he did our "Low-Inflation Environment." Inflation is practically everywhere
that counts: food, insurance premiums, utility bills, tuitions. ("Where it
counts" does not include the deflation of what really counts: wages, net wealth,
house prices. This is why the "inflation vs. deflation" question is false.)
Commodity prices keep rising, partially because there is greater demand than
supply; partially because we are used to seeing oil and corn quoted in dollars.
Producer and consumer prices generally lag commodity prices. The length of
the lag differs. Anywhere from three months to one year captures most instances,
under normal conditions. (When further depreciation of the dollar against commodities
is anticipated, the lag will be compressed.) The dollar has fallen against
a basket of currencies by 13% over the past 18 weeks. It is prudent to at least
hedge for a contraction of this lag.

Bernanke's speech was characteristic. He turned logic on its head and ignored
the most debilitating consequences of his past actions. The Fed chairman used
official government numbers to claim inflation was too low. Homage to government
inflation calculations should have, alone, been enough for the media to ignore
anything else he said. Of course, he was dutifully quoted and taken at his
word.

It was not that long ago when an economist who claimed inflation was too low
would have lost credibility. Bernanke stated "that FOMC participants generally
judge the mandate-consistent inflation rate to be about 2 percent or a bit
below." The FOMC is the Federal Open Market Committee - the body that has absolute
authority to act upon such inverted thinking as 2% inflation being good for
the country.

A step back, to 1957: This was a time when academic economists were learning
that theories manipulated to satisfy politicians could put themselves in positions
of power. Most from this guild never dreamt anyone outside a college classroom
noticed their existence. They miscalculated, as is the rule for these humbugs.

Politicians want money and credit to fulfill their constituents' every wish.
A Harvard economist told Congress that the U.S. needed a 2% rate of inflation
to defeat communism. Washington loved him.

On August 13, 1957, William McChesney Martin, the Federal Reserve chairman
at the time (and not an economist - he had been a Latin scholar at Yale, so
understood that shortcuts destroy empires), lectured the Senate Banking Committee
on the specific topic of the Federal Reserve "targeting" (Bernanke's word -
not Martin's) a 2% rate of inflation: "Consumers are encouraged to postpone
saving and instead purchase goods which they do not immediately need, and the
incentive to strive for efficiency no longer governs business decisions...and
speculative influences impair reliance upon business judgment." Of utmost importance,
groups struggle to insulate themselves from the loss of purchasing power, then "fundamental
faith in the fairness of our institutions and our government deteriorates."

The Bernanke Fed has stated its current policy is to chase consumers out of
savings and into speculative ventures. (See The
2004 Fed Transcripts: A Methodical, Diabolical Destruction of America's "Wealth".)
That is exactly the recipe for the Fed to accelerate its impoverishment of
the American people. Alan Greenspan, of course, was the master at jumbling
a few words to distract attention from this long-running plan to prevent the
Fed's extinction. Bernanke also resorts to nonsense. From his October 15, 2010,
speech: a 2% rate of inflation is to "attain... price stability" and to "bring
the unemployment rate down significantly." He is doing exactly the opposite
of what he pretends.

George Orwell wrote about "[t]his lunatic world in which opposites are turned
into one another." That was not lunacy for lunacy's sake, nor is it today.

In 1940, Orwell wrote of World War II: "After 1936, of course, the thing was
obvious to anyone except an idiot." He was not erasing his own past, as was
common with many others and is universal among "experts" today. (See the first
paragraph of Ben Bernanke's October 15, 2010, speech.) In 1938, upon returning
to England from continental Europe, Orwell had written about the "familiar
streets, the posters telling of cricket matches and Royal weddings, the men
in bowler hats, the pigeons in Trafalgar Square, the red busses the blue policemen
- all sleeping the deep, deep sleep of England, from which I sometimes fear
that we shall never wake till we are jerked out of it by the roar of bombs." The
bombs flattened London in 1940.

The British institutions in the 1930s were in the same condition that the
Federal Reserve, other government manipulators, the so-called economics profession,
and the revered think tanks are in today. Orwell wrote of Neville Chamberlain,
British Prime Minister from 1937 to 1940: "He was merely a stupid old man doing
his best according to his very dim lights. It is difficult otherwise to explain
the contradictions of his policy, his failure to grasp any of the courses that
were open to him. Like the mass of the people, he did not want to pay the price
either of peace or of war. " At another point: "Tossed to and fro between their
incomes and their principles, it was impossible that men like Chamberlain should
do anything but make the worst of both worlds."

This is an apt summation of the desiccated American hierarchy today. It is
withering into dust.

Chamberlain had trusted Hitler, as had his predecessor, Stanley Baldwin. As
prime minister, Baldwin had suppressed information about Hitler's rearmament,
sleeping, as was his wish, the deep, deep sleep of England. Orwell wrote: "One
could not even dignify [Baldwin] with the name of stuffed shirt. He was simply
a hole in the air." Baldwin did everything he could to prevent any disruption
to the exact relations that existed among the social and political institutions
of the day.

Winston Churchill, not in office but a nuisance to the established order,
knew the proportions of Nazi rearmament and gave speeches in Parliament with
uncomfortable details. Baldwin's cabinet voted to ban "independent views" from
the BBC. Sir John Reith, dictator of the BBC, prevented Churchill from speaking.
CNBC does much the same today, as does the print media.

Geoffrey Dawson, editor of The Times of London, suppressed Churchill's
views as well as those from Times reporters whose dispatches from Europe
might upset Hitler. In 1935, Dawson wrote, "I do my utmost, night after night,
to keep out of the paper anything that might hurt their [Nazi] susceptibilities." He
wrote this letter because he could not understand the Fuhrer's ingratitude
after, in the words of William Manchester, "five years of jumping through Hitler's
hoops."

Dawson was not a Nazi but a dense, frightened old man who wanted the world
to stand still. We can see the same combinations of dis-enlightenment that
keep the American public in the dark today. An example is the coordination
among government agencies (their data dissemination propaganda) and the Federal
Reserve's contorted views as expressed through the country's news collection
agencies.

The Associated Press released the following on October 14, 2010, a day ahead
of Bernanke's speech:

(AP) "Wholesale inflation stayed tame last month outside of a sharp rise
in food and energy prices. Moderate price inflation allows the Federal Reserve
to keep the short-term interest rate it controls at a record low of nearly
zero, where it has been since December 2008."

With that, the AP assured its access to the Fed chairman.

In 1952, Bernard Iddings Bell wrote Crowd Culture, in which he discussed
a wartime incident: "When Russia was Hitler's ally in World War II, the American
people were told by the papers, and believed, that the Russians were little
short of fiends. Suddenly Russia changed sides.... [S]he became our ally. At
a dinner in New York at that time, I sat next to a high-up officer of one of
the great news-collecting agencies. 'I suppose,' I ventured, 'now that the
Muscovites are on our side, the American people will have to be indoctrinated
so as to stop thinking of them as devils and begin to regard them as noble
fellows.' 'Of course,' he replied. 'We know what our job is in respect to that.
We in the working press will bring about a complete and almost unanimous volte
face in the belief of the Common Man about the Russians. We shall do it
in three weeks.' He was right about it. The papers, fed by the news agencies,
did just that."

On March 29, 1943, Life magazine published a "Special Issue USSR." On
the front cover is a portrait of Uncle Joe Stalin, beaming downward, as if
the dictator is looking upon his 3-year-old nephew who just counted to 10 for
the first time. Over 100 pages of the issue describe the Soviet Union's wholesome
leaders and their obliging peasantry.

Among the wholesome leaders is Vladimir Ilyich Ulyanov (Lenin), with a similar,
avuncular portrait, as if he's looking at the same nephew who just counted
to 20. The article, "The Father of Modern Russia," starts off "Perhaps the
greatest man of modern times was Vladimir IIyich Ulyanov." It goes uphill -
or downhill - from there, depending on one's view.

Flipping through the issue, the article "Collective Farms Feed the Nation" is
worth a look. Pictures of the peasants are inspiring. They were a happy lot.
The story starts off: "Although Russia was always overwhelmingly an agricultural
country, most Russians used to go hungry." Later in article: "Whatever the
cost of farm collectivization, in terms of human life and individual liberty,
the historic fact is it worked." The cost of farm collectivization included
several million Ukrainians who had been starved to death in the early-1930s.

"Collective Farms" could be written by an economist - then or now - without
irony or conscience. Such a contortion of reality would do wonders for a rising
academic or Federal Reserve staffer.

Orwell was harsh in his criticism of the intelligentsia, whose loyalties were
as fickle as their abstractions. He did not confuse the term, intelligentsia,
with intelligence. It was a collection of layabouts who, in a "desire for psychological
escape" indulge in "chauvinistic sentiments that would be totally impossible
if you recognized them for what they were." Such a person is "capable of the
most flagrant dishonesty, but also - since he is conscious of serving something
bigger than himself - unshakably certain of being right."

In their world: "Material facts are suppressed, dates altered, quotations
removed from their context and doctored to alter their meaning." Communism
was an outpost for many of the intelligentsia in the 1930s. John Reed, author
of Ten Days That Shook the World, (about the Russian Revolution), had
willed the publication rights of his book to the British Communist Party. Reed
died in 1920. The British Communist Party did exactly what Moscow wanted: it
published an edition that excised Leon Trotsky's role in the revolution and
deleted an introduction by Lenin.

Orwell wrote: "Events which, it is felt, ought not to have happened are left
unmentioned, and ultimately denied." British Communists were badly shaken by
the Russo-Nazi pact (Molotov-Ribbentrop) in 1939, an eventuality not difficult
to forecast by a party whose subservience to Moscow should have animated its
consciousness towards Russian self-interest.

Bernanke, the Fed, and the other weary institutions fall within Orwell's description
of Chamberlain and his circle: "What is to be expected of them is not treachery
or physical cowardice, but stupidity, unconscious sabotage, an infallible instinct
for doing the wrong thing. They are not wicked, or not altogether wicked; they
are merely unteachable. Only when their money and power are gone will the younger
among them begin to grasp what century they are living in."

Of Bernanke today, he is a combination of both the establishment and the regimented
intelligentsia that has acquired power. Orwell wrote of the intelligentsia: "Clearly
there was only one escape for them - into stupidity. They could keep society
in its existing shape only by being unable to grasp that any improvement was
necessary" After a time, which looks like it will be after Bernanke and his
comrades have done their worst, a leader, looking at the world as it is, may
state:

"Difficulties began to build up in the economy in the 1970s, with the rates
of economic growth declining visibly.... A lag ensued in the material base
of science and education, health protection, culture and everyday services.
Though efforts have been made of late, we have not succeeded in fully remedying
the situation. There are serious lags...in the improvement of the people's
standard of living."

Thus spoke Mikhail Gorbachev in his 1986 speech to the 27th Communist Party
Congress when he effectively declared the institutions which had colluded to
bankrupt the nation's economy and spirit were dead.

Sheehan serves as an advisor to investment firms and endowments. He is the
former Director of Asset Allocation Services at John Hancock Financial Services
where he set investment policy and asset allocation for institutional pension
plans. For more than a decade, Sheehan wrote the monthly "Market Outlook" and
quarterly "Market Review" for John Hancock clients.

Sheehan earned an MBA from Columbia Business School and a BS from the U.S.
Naval Academy. He is a Chartered Financial Analyst.